A commercial real estate letter of intent (LOI) is a written, usually non-binding proposal that lays out the main business terms of a lease or purchase, such as price or rent, term, deposits, and timelines, before lawyers draft the final contract. One party sends the LOI, the other negotiates or accepts it, and the agreed terms then become the basis for a lease or purchase and sale agreement.
Why an LOI exists
Drafting a full lease or purchase contract takes time and legal fees. An LOI lets both sides confirm that they agree on the major points before spending that money. It also gives each party a clear record of what was proposed, which reduces misunderstandings later. In most commercial deals, the LOI is where the real negotiation happens; the lease or contract mostly documents what was agreed.
Is an LOI binding?
In most cases, the business terms of an LOI are expressly non-binding: either party can walk away or renegotiate. Some provisions, however, are often written to be binding, such as:
- Confidentiality
- Exclusivity or a "no-shop" period, where a seller agrees not to negotiate with other buyers for a set time
- Access for due diligence
- Responsibility for each side's costs
- Governing law
Whether a particular LOI is binding depends on its wording and applicable law, so have an attorney review it before you sign. A good LOI states clearly which sections bind and which do not.
What goes into a lease LOI
A tenant or landlord LOI normally covers:
- Parties and premises: who is leasing, and the building and suite, including approximate rentable square footage
- Lease term and commencement: length of the lease and when rent starts
- Base rent and escalations: starting rent per square foot and scheduled annual increases
- Lease type and expenses: NNN, modified gross, or full service, and how taxes, insurance, and CAM charges are handled
- Tenant improvement (TI) allowance: money the landlord contributes toward build-out, and who manages construction
- Free rent or concessions: abatement periods, if any
- Security deposit and guaranty
- Renewal options, expansion rights, and termination rights
- Permitted use, signage, and parking
- Delivery condition: as-is, or landlord work to be performed
- Timeline: response deadline for the LOI and target date for lease drafting
Our guide on how to negotiate a better commercial lease goes deeper on how to push on these terms, and tenants sending an LOI often use a tenant representative to prepare it.
What goes into a purchase LOI
A buyer's LOI to purchase a property typically includes:
- Property description and address
- Purchase price and how it will be paid (cash, financing, or a combination)
- Earnest money deposit amount, and when it becomes non-refundable
- Due diligence period, such as time to review leases, financials, title, survey, and environmental reports
- Financing contingency, if any, and the buyer's financing plan
- Closing date or timeline
- Seller deliverables, such as rent roll, leases, operating statements, and tenant estoppels (see how to analyze a rent roll)
- Exclusivity period
- Prorations and who pays closing costs
The LOI typically does not include every legal detail. Representations and warranties, remedies for default, and full contingency language come in the purchase and sale agreement.
LOI versus other documents
| Document | Purpose | Binding? |
|---|---|---|
| Letter of intent (LOI) | Outlines main business terms for a lease or sale | Mostly non-binding, with some binding clauses |
| Term sheet | Similar to an LOI, often shorter and in bullet form | Usually non-binding |
| Request for proposal (RFP) | Tenant's request that landlords submit terms | No |
| Lease or purchase and sale agreement | Full legal contract | Yes, once signed |
How the process usually works
- Identify the property. A tenant or buyer finds a space or building that fits their needs and budget.
- Prepare the LOI. The broker and client decide on terms. It helps to know current comparable rents or sales so the offer is credible.
- Submit it. The LOI goes to the landlord, seller, or their broker.
- Negotiate. The other side responds with a counter. Expect several rounds, often through marked-up versions of the LOI.
- Agree and sign. When the main terms are settled, both parties sign the LOI, including any binding sections.
- Document the deal. Attorneys draft the lease or purchase agreement. Pay attention to anything that differs from the LOI.
- Complete due diligence and close or commence.
Example of how an LOI shapes a deal
For example (hypothetical): a business owner wants 6,000 square feet of flex space in Prince William County. The LOI proposes a five-year term, a starting rent with 3 percent annual increases, a three-month free rent period, and a TI allowance to build out an office area. The landlord counters with a lower allowance but agrees to shorter free rent. After two rounds, both sides sign the LOI, and the landlord's attorney drafts the lease reflecting those agreed terms. These numbers are illustrative only and are not market data. Actual terms depend on the property, the submarket, and the parties involved.
Mistakes to avoid
- Leaving key items vague. If the LOI does not mention who pays for HVAC repairs or what the renewal rent will be, those issues surface later when it is harder to negotiate.
- Treating it as fully non-binding. Exclusivity and confidentiality clauses can bind you.
- Skipping legal review. A short document can have long consequences.
- Offering without market knowledge. An offer far from market either wastes time or gives away value. Comparable data from CoStar or a broker's analysis helps set the opening terms.
- Negotiating one property only. Tenants especially benefit from competing proposals on two or three spaces to gain leverage.
How to make an LOI easier to close
The strongest LOIs are specific without being rigid. State the numbers that matter most to you and leave flexibility on secondary items you can trade. A tenant that cares most about a TI allowance might accept a smaller free rent period; a buyer who needs a longer due diligence window might offer a larger earnest money deposit in return. Setting a response deadline keeps the process moving, and attaching a short summary of your business or investment background helps the other side take the proposal seriously. Finally, keep a running comparison of each counter against your original, so you can see precisely what has moved and what you have given up.
Who sends the LOI: tenants, buyers, landlords, sellers
Tenants and buyers normally send the LOI, but landlords and sellers sometimes issue one to set terms for a prospect, especially in off-market or negotiated sales. If you are a property owner who wants to understand what proposals to expect, see our landlord representation service. If you are buying, our guide to commercial real estate acquisitions outlines the next steps.
Next step
If you are preparing an offer or responding to one, call us at 703-505-3501 or use our contact page. We can help you structure the proposal and compare it with current market activity. You can also browse properties for lease and properties for sale.
Frequently asked questions
What is a letter of intent in commercial real estate?
It is a written proposal outlining the main terms of a lease or purchase before a formal contract is drafted. It is generally non-binding, apart from certain clauses like confidentiality or exclusivity.
Is a commercial LOI legally binding?
Usually not as to the deal terms, but some sections can be binding. The wording controls, so have an attorney review the document before signing.
Who writes the LOI?
Typically the tenant or buyer, often with a broker's help. The landlord or seller (or their broker) then responds with changes or acceptance.
How long does LOI negotiation take?
It varies with the deal's complexity and how quickly each side responds. Simple leases may settle in days or weeks, while larger sales or build-to-suit leases can take longer.
What happens after the LOI is signed?
Attorneys draft the lease or purchase and sale agreement, and the buyer or tenant begins due diligence. The final contract may include details not covered in the LOI.
Can I negotiate with several landlords at once?
Yes, tenants commonly send LOIs for more than one space, as long as they avoid signing any exclusivity commitment that would block it.
Do I need a broker to write an LOI?
Not required, but a broker can help set realistic terms using current comparables and ensure the key issues are addressed. An attorney should still review the final document.
